Monday May 02, 2016

New Revenue Recognition Guidelines: What Challenges Do the New Rules Present?

Part four of a 6-part series on new revenue recognition guidelines.

The new revenue recognition guidelines, proposed jointly by FASB and IASB, will impact multiple areas of affected organizations. They are likely to affect IT systems, internal processes and controls. For many organizations, changes in the way revenue is recognized and reported will generate questions from external stakeholders and concerns from the organization’s staff. 


With the new revenue recognition guidelines, expect IT systems to be impacted: 

Enterprise resource planning (ERP) systems may need to be upgraded or modified to capture additional data to support the necessary accounting and disclosures. How and when does your ERP system allocate prices for products and services? Does it have the capabilities to accrue for liabilities of goods and services to customers by performance obligation? Is it capable of recognizing transfers to customers of the performance obligations over time using the seven new tests of GAAP, rather than the old four? 

There will likely be a need to report revenue under new and existing guidelines. It will take some time for external stakeholders to get adjusted to the new results being reported and understand how the new reports map to the old way of doing things. In an effort to ease this transition, many organizations will want to report using both guidelines for a pre-determined period of time.  

Since the new guidelines often require judgment and use of estimates (both estimated selling prices and variable considerations) to value the performance obligations, internal controls and accounting procedures will need to be reviewed and, in many cases, revised. Do you have a pre-accrual estimation process in place?  Do you have post-accrual revision of estimation process in place?

Anticipate external questions. Key financial measures and ratios may change, which could affect analyst expectations. 

Expect internal concerns. The new rules may impact sales commissions, bonuses, budgeting, and compliance with contractual covenants. For example, the revenue recognition guidelines are likely to trigger reviews and changes to organizational sales and contracting processes. Additional thought will need to be given to contract language and sales compensation plans.

How do I go about introducing the new revenue recognition guidelines to my organization? See part 5 of this series, “What should I be doing?” for some guidance. Other articles in the New Revenue Recognition Guideline series can be reviewed by clicking the respective title: 


FAQs:

Part two: What are the new guidelines? Can you provide a simple example?
Part three: Who is affected?
Part five: What should I be doing?
Part six: How will Oracle’s experience help?

To learn more about Enterprise Performance Management, click here.

Monday Apr 25, 2016

New Revenue Recognition Guidelines: Who is Affected?

Part three of a 6-part series on new revenue recognition guidelines.

The new revenue recognition guidelines redefines “revenue” for every US GAAP and IFRS company.  But, its impact is more severe for companies who offer discounted goods and services alongside fully-priced goods or services, and for those who deliver to customers over extended time periods, or both simultaneously. 

There are exceptions; the guidelines do not apply to organizations covered by other standards (e.g., insurance or leasing contracts).


All companies need to review their revenue for hidden bundling and implicit performance obligations. These guidelines are likely to impact pharmaceutical companies, telecoms, construction contractors, real estate developers, auto companies, and other firms with multiple sources of revenue.

Organizations - Examples

1. A software company ships a new game, but some missions or episodes are missing: 


Under today’s GAAP, they would defer all the revenue until the missing episodes were published. 

Under the new guidelines, they recognize revenue that relates to the delivery they performed, and postpone recognizing the remainder of the revenue until the delayed missions are delivered. A key question is how to identify and value a performance obligation of this nature, especially since this company doesn’t sell missions separately.


2.

a. A cellular telephone sold under contract that includes automatic software upgrades for one year is considered a single performance obligation.
b. A phone with a list price of $600 is sold to a customer under a service contract for $200. The cell bandwidth revenue for that client must be recognized to include a “claw back” of the difference of the list and selling price of the device.

3. An auto dealer that includes maintenance services with the sale of a car can only recognize the service revenue once the owner of the car brings it in for maintenance.

4. Similarly, high-tech companies that include software licenses, consulting, and support services on sales contracts determined to be related will recognize service revenue once the services are delivered.

How will the new revenue recognition guidelines affect my organization? Look at part 4 of this series, “What are the challenges for affected organizations?” to answer this question. Other articles in the New Revenue Recognition Guideline series can be reviewed by clicking the respective title: 


FAQs:

Part two: What are the new guidelines? Can you provide a simple example?
Part four: What are the challenges for affected organizations?
Part five: What should I be doing?
Part six: How will Oracle’s experience help?

To learn more about Enterprise Performance Management, click here

Tuesday Apr 19, 2016

New Revenue Recognition Guidelines: What Are the Guidelines and Examples?

Part two of a 6-part series on new revenue recognition guidelines.

The core principle of the new guidelines is to recognize revenue to depict the transfer of promised goods or service to customers in an amount that reflects the consideration to which the entity expects to be entitled for those goods or services2. That is, the aim is to recognize revenue consistently as the customer assumes ownership of the various components of a contract, and values the revenue at that obligation’s appropriate share of the expected revenue.

Steps to achieve this core principle:

Establish the contract with the customer
Identify the performance obligations (promises / deliverables) in the contract
Determine the (overall) transaction price
Assign the transaction price to the contract’s performance obligations
Recognize revenue as the reporting organization satisfies a performance obligation



A Simple Example
Your organization sells a computer system and printer to a customer for $1,000. The computer and software are delivered to the customer in June but, due to manufacturing delays, the printer is delivered in July. Under the new Performance Obligation guidelines, when is the revenue for the various components of the contract to be recognized?

1. A contract is established for a computer system

2. Consisting of three performance obligations:


a. Laptop computer
b. Software
c. Printer
3. The overall transaction price is $1,000
4. The company’s standalone selling prices are:


a. Laptop: $800
b. Printer: $200
c. Software: $200
(Total: $1,200) 


Under the contract, then, the performance obligations are assigned transaction prices of: 

a. Laptop: $1,000 / 1200 * 800 = $666.67
b. Printer: $1,000 / 1200 * 200 = $166.67
c. Software: $1,000 / 1200 * 200 = $166.67
(Total: $1,000)

Once either party has acted on the contract (i.e., at the earlier of the customer accepting an invoice or the vendor commencing shipping), the vendor accrues the liability to the customer for each performance obligation at the assigned revenue valuations.

5. Upon delivery of the laptop and software, the vendor recognizes $833.33 in June. At the end of June, the balance sheet shows an accrued liability to the customer of $166.67 for the printer. In July, when the client takes ownership of the printer, the vendor recognizes $166.67.

Do the new revenue recognition guidelines affect you? Part 3 of this series, “Who is Affected?” may help you answer that question. 

Other articles in the New Revenue Recognition Guideline series can be reviewed by clicking the respective title:

Part one: Like it or not, they’re on the way 

FAQs:
Part three: Who is affected?
Part four: What are the challenges for affected organizations?
Part five: What should I be doing?
Part six: How will Oracle’s experience help?

To learn more about Enterprise Performance Management, click here.


2
Retrieved on March 9, 2016 from FASB web page: http://www.fasb.org/jsp/FASB/Page/BridgePage%26cid=1351027207987

Monday Apr 11, 2016

New Revenue Recognition Guidelines: Like it or Not, They’re on the Way

Part one of a 6-part series on new revenue recognition guidelines.

In May, 2014, the Financial Accounting Standards Board and the International Accounting Standards Board issued a joint revenue recognition standard related to customer contracts. The new guidelines impact most organizations that deliver goods and/or services on a contract basis, especially when delivered over extended periods of time.

Using the new guidelines for revenue recognition, companies align revenue to the delivery of “performance obligations.” They must account for these obligations - items that are owed to the customer under the terms of the contract - as accrued contract liabilities, and extinguish them by transferring those items to customers and recognizing revenue on the successful transfer. No longer will companies apply the variety of current practices for recognizing revenue (for example, deferring revenue on early invoicing) or apply current, by-industry US revenue guidance. Application of the guidelines will require some companies to recognize that a contract exists where they previously may not have thought they had one.




The aim of the joint guidelines is to establish a common set of global standards for all companies to recognize and report revenue. But, it’s not really about accounting as much as it’s about capital markets. By uniformly applying these guidelines, it becomes easier for external stakeholders (such as shareholders or financial analysts) to compare revenue performance between organizations. It’s also interesting to note that in a September 2013 speech, SEC Enforcement Director, Andrew Ceresney stated that “Revenue recognition issues will remain a staple of our financial fraud caseload.[1]”

There isn’t a great deal of time remaining to implement these new guidelines. Public organizations should apply the new revenue standard to annual reporting periods beginning after December 15, 2017. Nonpublic organizations should apply the new revenue standard to annual reporting periods beginning after December 15, 2018.

These guidelines represent a major shift in revenue recognition for affected companies. For some, it represents the first time that they’ve had to rethink how they “count” revenue, and they may not be sure of what’s involved in this switch from a procedural or systems perspective. Others, especially for those who went through the adoption of IFRS standards in 2007, have experienced this type of transformation before. And many organizations, with Oracle’s help, made that IFRS transition smoothly.

With the tight timeline, and some very serious decisions to be made, many will have questions. Other articles in the New Revenue Recognition Guideline series can be reviewed by clicking the respective title (as they become available):

Part two: What are the new guidelines? Can you provide a simple example?
Part three: Who is affected?
Part four: What are the challenges for affected organizations?
Part five: What should I be doing?
Part six: How will Oracle’s experience help?

To learn more about Enterprise Performance Management, click here.
__________________



[1]
Retrieved on April 5, 2016 from SEC web page: https://www.sec.gov/News/Speech/Detail/Speech/1370539845772


Tuesday Sep 03, 2013

Align Cost with Revenue for Profitable Growth in Diversified Industries

Historically, growing revenue typically equated to increased profitability for most organizations, but in this economy this statement is no longer true. On this subject, I was very fortunate to interview Ralph Canter, Managing Director, and part of KPMG’s Diversified Industries Practice (an Oracle Platinum Partner) and Bart Stoehr, Senior Director of Product Management for Oracle in an Oracle AppCast podcast. 

According to Ralph, diversified industries – which includes global manufacturing – has had a roller coaster ride in terms of profitability over the last 20 years. Post 2008, many experienced slowed, stalled or even reversed growth so much so that companies had to focus on how to stop the bleeding and reduce/control costs rather than focusing on increasing revenue. Growth for growth’s sake was no longer sustainable so companies had to adopt what KPMG calls ‘profitable growth’. This is growth with a lens or focus on serving many market segments and many demands on product, supply chain, and customer satisfaction.

I asked Ralph to tell us about the biggest hurdles to profitable growth and being able to measure it. He told us, “The biggest hurdle has been that the game has kind of changed. Systems have been developed over time to support the measurement of how growth used to be – which was more regional and stable and long term – and you had a timeframe in which to build the system to address a certain growth period. Today, in a global environment, the global view is segmented by customer, by product, by channel, by region, by market, by sales channel – all kinds of dimensions. And what’s happened since 2008 is that the revenue picture has become a very, very sophisticated analysis that is very aligned to tell you where you’re growing. What’s been left behind is the cost view of that growth. So while I have really good aligned OLAP cubes analyzing my revenue growth, I do not have an associated, detailed cost model that can align with that revenue to create a profitability analysis of the revenue growth view. What we see is a limitation in the maturity of cost to keep up with the maturity of how you are analyzing your revenue and your profitable growth.”

So what became clear was, in this economy, profitability is no longer as simple as subtracting cost from revenue!


Once we were clear on the issues, I asked Ralph to tell us more about how Oracle Hyperion Profitability and Cost Management and KPMG can help organizations with profitable growth.  Ralph told our listeners, “Our point of view starts with revenue and not cost. We help customers understand how they want to measure their growth and then help them design their cost information ‘content’ to make sure we can answer the profitable growth question. In most cases this means reconstructing a cost view that matches up to the profitable growth questions. This is where the functionality of Hyperion Profitability and Cost management is leveraged to not only support the reconstruction, but also keep cost and revenue aligned and reportable”.

I asked Bart if he could talk about some Oracle Customers that are practicing profitable growth and he specifically mentioned Leggett and Platt (invented the bed spring in 1885) who are now quantifying the cost of delivering special services to their customers, assessing the value of those services, improving product portfolio management, attacking cost reduction opportunities and streamlining operations (to mention a few objectives). Bart told our listeners that Leggett and Platt are using a combination of Oracle Hyperion Planning and Hyperion Profitability and Cost Management to push GL costs to align them with revenues by pooling the costs, moving them to activities where they are consumed by the various products, customers and customer segments, and then driving them down based on product consumption characteristics. Leggett and Platt are using some of the costs derived by Oracle Hyperion Profitability and Cost Management to perform driver based planning in Hyperion  Planning - the power of the two working together are simply unmatched.

To help the listeners understand how Hyperion Profitability and Cost Management specifically helps with profitable growth, Bart and Ralph emphasized some key features used for this purpose. There are many of them, but their favorites are:

+ Any costing method or combination of methods that represent an organization well can be used. Nothing is prescribed but practicality is recommended
+The traceability map enables you to understand where costs come from, how they are consumed and where they go. This is important to help all members of the value chain understand what is going on
+The pre-configured ability to deal with excess capacity (Provides fully loaded view and incremental views of cost to help support current and future decision making)

There is much more to the interview, but it was certainly clear that many kinds of diversified and product-focused industries can benefit from using this method of growing profitably, and Ralph and Bart provided very interesting insight into the practicalities of growing profitably by aligning cost with revenue.

To listen to the entire podcast, click here.

For more information about Oracle Hyperion Profitability and Cost Management, click here.


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This blog will highlight key EPM market trends, recent events and other news of interest to our field, customers and partners.

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